Move likely to make it difficult for infrastructure investment funds to refinance projects

The Reserve Bank of India (RBI) has advised banks against giving loans to Infrastructure Investment Funds (InvITs), leaving them with no options for debt financing. This will make it nearly impossible for these trusts to refinance projects; important to the model which aims at efficient financing for infrastructure projects.

Banks and insurance companies invest in units of InvITs but are not lending to InvITs. What makes things more difficult is that the central bank has refinancing of rupee loans with external commercial borrowings on its negative list.

“We believe RBI has advised some banks through email that they should not provide lending facilities to InvITs. This is making things difficult for us as this has been one of the largest source of capital,” Harsh Shah, CEO India Grid Trust.

An InvIT offers an opportunity to promoters of projects to sell their stake in completed projects to the trust, which in turn can raise long-term and tax-free funds from unit holders. The financial instrument generated a lot of interest among investors but as it is a new instrument, investors are still only warming up to it.

Recently, Sebi increased the leverage limit for InvITs to 70% of assets from 49% earlier in an attempt to give fillip to these trusts.

Some banks had sought clarity on the issue of lending to InvITs; their contention was that Sebi allows InvITs to raise debt so they may like to consolidate debt at trust level by raising fresh debt. Trust has better debt servicing capacity and funds don’t carry the default risks associated with project financing. RBI advised them not to lend to these trusts, according to sources directly involved.

On February 22, top executives of InvITs met the joint secretary of infrastructure policy and finance division at the Department of Economic Affairs, seeking help on bank financing. They wanted insurance regulators to issue clarification allowing investment in debt securities. RBI allows banks to extend credit subject to ratings, and money used via ECB is allowed to be used for refinancing. InvITs tried to assuage RBI’s concerns on double financing, infrastructure financing, and evergreening of loans.

“With banks, insurance companies and even international investors not able to subscribe to debt securities of InvITs, we are unable to raise debt for optimum tenures and rates. We are hoping that it’s resolved soon as debt instruments are an important part of the capital structure for infrastructure projects. InvITs, with their better-quality assets, ratings and predictable cash flows, could have benefited from refinancing. But as of now, thats almost stopped,” Shah said.